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June 24 — The U.K.'s exit from the European Union is expected to strengthen the drive led by
Germany and France to harmonize corporate tax policy—especially when it comes to an
upcoming attempt to revitalize a plan to develop a single set of rules that would
allow cross-border companies to file a single tax return for their EU activities,
according to European Parliament members, tax practitioners and some academics.

The U.K. departure also will eliminate a potential legal hurdle for a financial transactions
tax (FTT) that is in the final stages of negotiations by 10 EU countries, practitioners
said.

Other pending or upcoming tax legislation likely to be affected by the U.K. vote to
leave the EU includes revisions to the EU Anti-Money Laundering Directive that would
require making companies' real ownership public, a blacklist of tax havens along with
sanctions against them, and reporting of companies' taxes paid and profit earned in
each country of operation.

What effect, if any, the U.K.'s departure will have on the EU's highly publicized
state aid investigations is unclear. As EU officials ponder their role in the new,
dramatically different organization, they could conceivably decide to scale the investigations
back—or go forward with renewed energy.

“The whole vote suggests that there's maybe more of a populist concern about the EU,”
said Lilian Faulhaber, an associate professor at the Georgetown University Law Center,
adding that the state aid investigations, by looking into the tax practices of large
corporations, could play into that populism.

The state aid investigations looked into whether companies have received impermissible
state aid—banned under an EU treaty—through lax enforcement of transfer pricing rules
in advance pricing agreements or rulings.

CCCTB Test

The first big EU corporate tax policy test following the June 23 referendum will come
when the European Commission in October proposes a revised common consolidated corporate
tax base (CCCTB). Originally put forward in 2011, it has been stalled because of opposition
led by the U.K..

“The U.K. played a powerful role in the Council of Ministers when it came to countering
the French-German axis in favor of enhanced corporate tax harmonization and possibly
rates,” Stefaan de Baets, a Brussels-based corporate tax lawyer with PricewaterhouseCoopers
LLP, told Bloomberg BNA June 24. “That was especially true with the CCCTB. No doubt
France and Germany will now renew their push for corporate tax harmonization. It might
not happen immediately as it depends on what role that the U.K. will have in decision-making
process as it negotiates its exit.”

Exit Strategy

EU leaders and the European Parliament will convene starting on June 28 to map out
a strategy for the exit of the U.K.

European Commission President Jean-Claude Juncker said at a June 24 press conference
that until the U.K. departure is finalized, the country will retain voting rights
in the Council of Economic and Financial Affairs.

“We have rules to deal with this in an orderly way,” Juncker said. He added that “until
this process of negotiation is over, the United Kingdom remains a member of the European
Union with all rights and obligations that derive from this.”

The U.K. isn't expected to rush into beginning the separation process. British Prime
Minister David Cameron announced June 23, in conceding defeat of the Remain in the
EU camp, that the U.K. would wait to invoke Article 50 of the Treaty of Lisbon to
leave the EU until a new prime minister is appointed by October 2016. Leaders of the
official “Vote Leave Take Control” campaign also cautioned any future government not
to rush into invoking Article 50.

Besides the CCCTB, another test for an exiting U.K. will come after July 5, when the
European Commission proposes EU Anti-Money Laundering Directive revisions, which have
been called for in the wake of the Panama Paper revelations. A primary issue is whether
the revisions for beneficial ownership will extend to trusts, which the U.K. has opposed
in the past.

Possible Silver Lining

While most EU officials expressed regret at the U.K. vote to leave the EU, especially
over the geopolitical concerns it raises, some said there could be a silver lining
when it comes to corporate tax policy.

“Looking forward, post-Brexit, I do feel that we might be able to move more quickly
and more decisively not only on internal policy such as the FTT and the CCCTB but
also with regards to external steps such as the common EU list of tax havens and sanctions
against non-cooperative tax jurisdictions, where a number of them are part of the
British Commonwealth,”
Jeppe Kofod, a Danish member of the European Parliament and a spokesman on tax issues
for the Socialists and Democrats, told Bloomberg BNA June 24.

The European Commission in coming months is expected to present a “scoreboard”
rating foreign countries, including independent territories, linked with the U.K.
The list will serve as the basis of an EU tax haven blacklist that EU member states
are due to finalize in 2017.

Three days before the U.K. in-or-out referendum, the 28 EU countries agreed on the
Anti-Tax Avoidance Directive, the terms of which EU countries must implement into
national law by the beginning of 2019.

Because the ATAD goes beyond some provisions of the Organization for Economic Cooperation
and Development's recommendations on combating tax base erosion and profit shifting—including
on the issues of controlled foreign companies, exit taxation and interest limitation—questions
linger about how the U.K. parliament will handle the issue (120 DTR I-1, 6/22/16).

“I would not be surprised if the British Parliament decides to detach itself from
the Anti-Tax Avoidance Directive,” said Tommaso Faccio, a taxation professor with
the University of Nottingham, told Bloomberg BNA June 24. “As it is European legislation,
it will be seen as a negative.”

Faccio also said a U.K. exit from the EU poses potential clashes with EU competition
authorities over tax incentives that the U.K. will likely offer to persuade the banking
and financial services industry to remain or invest in London.

“One of the arguments that civil society groups made to remain in the EU during the
campaign was that if the country is out, the city of London will become a tax haven,”
said Faccio. “Now that it is leaving, the U.K. government will be keen to put in place
tax incentives to keep businesses from leaving and to attract new investment. That
will likely cause conflicts with the EU in the future.”

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